Pensions Update: Summer 2022
This is the Summer update from our Pensions Group. The update covers recent announcements from the Pensions Authority on IORP II, master trusts and one member arrangements; amendments to the Disclosure Regulations; the implications of EU sanctions on Russia; and the latest overview of complaints from the FSPO.
Pensions Authority Information Update
The Pensions Authority released an update in May providing information on a number of topics including pension benefit statements, annual compliance statements and the EIOPA stress testing exercise. Points to note were:
Pension Benefit Statements
The Authority has outlined that a pension benefit statement (“PBS”) will not be required to be prepared with an effective date earlier than 1 January 2023 as long as trustees or registered administrators continue to provide annual benefit statements or statements of reasonable projection to active members. The Authority has just published guidance on the calculation assumptions to be used for the PBS, further details of which will be included in our next update.
Annual Compliance Statement
Trustees of pension schemes must prepare an annual compliance statement (“ACS”) no later than 31 January each year for the preceding calendar year. The Authority has clarified that the form of ACS to be used for 2022 will be the same as the form used for 2021. While there will be no requirement to submit the 2022 ACS to the Authority, it has stated that it will be conducting sample checks and audits in respect of trustees’ obligation to prepare an ACS and that failure to prepare the ACS may amount to an offence liable to a prosecution. The Authority is currently developing systems for the digital submission of the ACS and trustees will be required to digitally submit the 2023 ACS to the Authority in February 2024.
Use of electronic communications
Trustees are permitted to provide information to members or beneficiaries in electronic form in accordance with section 2(8) of the Pensions Act 1990 (as amended) (the “Pensions Act”) provided they do so in a manner compliant with the Electronic Commerce Act 2000 (as amended). The Authority has confirmed that trustees are responsible for determining how those requirements are complied with and the type of consent (i.e. active or passive consent) required from members to facilitate the electronic provision of information. The Authority has indicated that in assessing the type of consent required trustees should have regard to the specific profile and experience of their own scheme membership.
Survey of schemes
The Authority indicated that it would conduct a short survey of a selection of defined benefit and defined contribution schemes in June 2022, subsequently launched on 9 June 2022. The survey is intended to assess schemes’ progress since the Authority’s original survey on IORP II preparedness was conducted in 2020. The findings will be published on the Authority’s website in September 2022.
Interpretation of ‘regulated markets’ requirement
As noted in our spring update, the Trust RACs (Investment) Regulations 2021 (S.I. 634 of 2021) and Occupational Pension Schemes (Investment) Regulations 2021 (S.I. 636 of 2021), by revoking prior regulations, appear to have had the effect of limiting the definition of “regulated market” (in a context where trustees must invest trust retirement annuity contract (“RAC”) or scheme resources predominantly in regulated markets) such that it now captures only those markets authorised and regulated pursuant to the EU’s Markets in Financial Instruments Directive. Previously the definition was explicitly broader, including certain other regulated markets, both within and outside of the EU. The Authority has stated that it is examining the impact of the revised definition and that it understands that schemes may decide to postpone investments or related decisions until it has concluded its examination.
2022 EIOPA stress test exercise
The European Insurance and Occupational Pensions Authority (“EIOPA”) launched its fourth EU-wide stress test for institutions for occupational retirement provision (“IORPs”) on 4 April 2022. The stress test will assess the resilience and potential vulnerabilities of defined benefit and defined contribution schemes and provide insight into how economic shocks affect IORPs. The Authority selected larger schemes for participation in the stress test and on 4 May, the Authority sent letters to the selected schemes to highlight the requirement to provide information to the Authority in accordance with section 156 of the Pensions Act. The deadline for these schemes to provide completed EIOPA reporting templates to the Authority was 13 June 2022.
The Authority’s update included a reminder that the following schemes will need to be in full compliance with all obligations under the Pensions Act by 1 July 2022:
- master trusts – schemes with unrelated participating employers;
- one-member arrangements (“OMA”) established on or after 22 April 2021; and
- any new scheme established on or after 1 July 2022.
All other schemes and trust RACs are required to be in full compliance with all obligations under the Pensions Act by 1 January 2023, although certain derogations apply to one-member arrangements established prior to 22 April 2021.
OMA IORP II Compliance
In late June, the Authority issued a specific reminder to trustees of One Member Arrangements (“OMAs”) established on or after 22 April 2021 of the imminent 1 July 2022 IORP II compliance deadline. In it, the Authority specifically noted that many of these new OMAs have been established by insurance companies and it highlighted that it had recently met with these companies to advise them of its concerns. The Authority stated that it had advised insurance companies that the use of standardised trustee services and policies, key function holder appointments and audited accounts replicated across a large portfolio of OMAs is unlikely to meet the compliance threshold. Further, it advised insurers that non-compliance of new OMAs would “not be tolerated post 1 July 2022” and that enforcement action, up to and including prosecution, may be taken against the pension scheme trustees responsible for running non-compliant OMAs.
The Authority did not elaborate or give guidance on what the appropriate proportionate compliance threshold is for OMAs. Given the current uncertainty and the position articulated by the Authority, the main insurance companies in the Irish market have currently suspended their provision of OMAs.
Disclosure Regulations: amendments for OMAs and small schemes
The Occupational Pension Schemes (Disclosure of Information) (Amendment) Regulations 2022 (the “Amendment Regulations”) came into force on 16 May 2022. The Amendment Regulations remove the exemptions from the annual reporting requirements under the Occupational Pension Schemes (Disclosure of Information) Regulations 2006 that had previously applied to OMAs and schemes with fewer than 100 members (“Small Schemes”).
On 14 July 2022, the Authority published an update on the implementation of the Amendment Regulations. The Authority stated that trustees of OMAs and Small Schemes would be required to produce an annual report and audited accounts for scheme years ending on or after 31 July 2022. There is no obligation on trustees to provide annual reports or audited accounts in respect of scheme years ending before this date, although trustees of Small Schemes are required to provide alternative annual reports for these scheme years.
The Authority released an update for master trusts in June 2022. The update provided information for master trusts in relation to the IORP II master trust compliance deadline of 1 July 2022 and in respect of questions posed to the Authority by parties involved with master trusts over the previous 12 months. The update expands on the Authority’s code of practice for trustees as it applies to master trusts and addresses areas such as trustee qualifications and obligations, capitalisation, continuity plans and marketing material.
Trustee structure and conflicts
The update confirms that the trustee of a master trust must be incorporated as a designated activity company (“DAC”), that the DAC may only act as a trustee for one named master trust and that this role must be the sole purpose of the DAC. While an individual can act as a director of a number of master trust trustee DACs, the Authority reminded directors of their obligation to avoid any potential conflicts of interest that may arise as a result of acting on the boards of several master trusts.
Marketing materials and admission
A trustee must ensure that information contained in master trust marketing materials is consistent and does not mislead members with respect to the terms of the master trust. The Authority also stated that trustees must agree, in general terms, to the admission of new members and be satisfied with the terms on which any new members are admitted to the master trust (especially with regard to charges). In addition, the trustee must be satisfied that what is being communicated to members/employers is accurate and that in particular, there is sufficient capacity to manage any large numbers of incoming members.
Master trust capitalisation
The Authority outlined that the requirement for capitalisation will not be waived where the master trust has the backing of a financially secure founder. Further, the Authority clarified that projected income may not be offset against the reserve requirement for a master trust and even if the master trust founder is already required to hold capital by a financial services regulator, the master trust itself must still be capitalised. The Authority indicated that the capital reserve can be made available by the founder either as a capital contribution to the trustee DAC or via an escrow account with a legally binding letter of credit from the founder to the trustee DAC. The Authority stated that it will consider alternative arrangements for holding the capital reserve on a case-by-case basis, although in all cases it is essential that the trustee DAC has access to the capital reserve at all times.
The Authority states that trustees must be centrally involved in developing and approving any continuity plan put in place for a master trust. The trustee must have a clear understanding of the growth trajectory of the master trust and how this growth can be managed to ensure that member interests are protected. The Authority recommends that trustees engage with founders in relation to plans and timings relating to the transfer of existing clients to the master trust and satisfy themselves that there is operational capacity and sufficient capital to cover increased membership. Further, trustees must also satisfy themselves that the underlying assumptions and overall robustness of the plan are reasonable. The review and approval of plans remains a matter for the trustee.
Reporting to the Authority
Breaches to capital requirements, wind-up decisions and changes in control of the trustee DAC should be notified to the dedicated lead supervisor within the Authority in writing by the trustee. Where a key function holder is appointed from within the founder organisation this will be considered to be outsourcing and the trustee should notify the Authority in accordance with the code of practice.
Government Response to the Pensions Commission Report / Government Legislation Programme
The Government’s response to the Commission on Pensions report, which had been expected in April, has been delayed until the autumn. The Commission on Pensions report was published in October 2021 and made a number of recommendations regarding the state pension system, most notably that the State Pension Age should rise on an incremental basis to 67 by 2031 and 68 by 2039. While the Government’s official response is awaited, the Taoiseach recently indicated a shake-up in the pension system and that the concept of retiring at 66 needed to change.
EU update: Commission publishes regulation to implement a final extension to the EMIR clearing exemption for pension schemes
The European Commission published a regulation to permit a final extension to the exemption for pension schemes from the European Market Infrastructure Regulation (“EMIR”) central clearing obligation on 9 June 2022. The existing exemption had been due to expire on 18 June 2022. The EMIR central clearing obligation would require pension schemes to clear over-the-counter derivative contracts with a central clearing party. In its annual report to the European Parliament and Council published alongside the regulation, the Commission noted that there had been substantial progress towards the introduction of central clearing for pension schemes arrangements but that further time is required to allow for finalisation of the operational measures required for central clearing to operate efficiently. The central clearing obligation will now apply to pension scheme in full from 19 June 2023.
EU sanctions: expiry of deadline for occupational pension schemes to apply for Central Bank derogation
On 5 July 2022, the deadline expired for occupational pension schemes with beneficiaries who are Russian nationals or Russian resident non-EU nationals to apply for a sanctions derogation from the Central Bank of Ireland (“CBI”). The fifth round of EU sanctions on Russia include a prohibition on EU persons acting as trustee of a trust which has a Russian national or a Russian resident as a settlor or beneficiary (the “Prohibition”), although there are exceptions for EU nationals and Russian nationals with the right to reside in the EU. The Prohibition is broad enough to include Irish pension schemes with members or pensioners who are Russian nationals or Russian residents and the trustees of such schemes will be committing a criminal offence if they continue to act as trustees after 5 July 2022 unless a derogation from the Central Bank of Ireland had been claimed by this date.
Financial Services and Pensions Ombudsman Overview of Complaints
The Financial Services and Pensions Ombudsman (the “FSPO”) has published its overview of complaints received in 2021. The FSPO received 4,658 complaints in 2021 with just 4% of complaints concerning pension schemes.
The majority of complaints concerning pension schemes were made in respect of occupational pension schemes with a smaller number of complaints relating to personal retirement savings accounts (“PRSAs”) and trust RACs. The most common conduct complained of in respect of pension schemes was maladministration with the FSPO also receiving complaints relating to the calculation of pension benefits and failure to provide correct information. The FSPO’s overview highlighted two case studies relating to pensions. These case studies were highlighted as they involved the complaint ultimately being referred to the Authority.
The first case study concerned an individual who took voluntary redundancy and received a lump sum as part of their severance package. The individual signed a waiver acknowledging that the lump sum on redundancy would affect the lump sum payment from their occupational pension scheme at retirement age. The individual subsequently contacted their former employer to discuss their retirement options on a number of occasions and received information that led the individual to believe that they retained the right to a lump sum on retirement. Two months prior to the individual’s retirement date they received a letter from their former employer confirming that they had waived their right to a lump sum payment on retirement and the individual referred a complaint to the FSPO. The FSPO found that the employer failed to initiate its formal complaints procedure following the initial complaint from the individual and upheld the individual’s complaint that they were given misleading information. While the FSPO did not make an award as the individual had not suffered any financial loss, the employer offered an ex-gratia payment of €500 to the individual.
The second case study related to an individual who had commenced employment in 2014 but, at the time of making their complaint in January 2020, had not received a single annual pension benefit statement from their employer in respect of his benefits under the Single Public Service Pension Scheme. The individual had made a number of requests to their employer for the benefit statements and contacted the Authority in respect of the matter but had still not received an annual pension benefit statement. The individual stated that the failure to provide the statements had resulted in them being unable to make additional voluntary contributions (“AVCs”) to their pension due to a lack of sufficient information and that this consequently had a negative impact on their pension. The FSPO upheld the individual’s complaint and noted that the employer’s failure to provide annual pension benefit statements was not disputed. However, the FSPO did not award compensation for financial loss as the member had not been prevented from making AVCs. The FSPO accepted that the individual had been denied the opportunity to make a more informed decision about their AVCs, but the FSPO does not have the power to award compensation for loss of opportunity. The FSPO referred the decision on to the Authority for any further necessary actions to be taken against the employer.
It is worth noting that the FSPO solely has the power to order financial redress that is not in excess of “any actual loss of benefit under the scheme concerned”. The FSPO does not have the power to award compensation or damages and this is acknowledged in these two case studies. They also acknowledge that the FSPO does not have the power to award compensation for “loss of opportunity”, which is a useful clarification.